At some stage, most of us will be asked to lend money to family or friends. Usually, we are only too happy to help. After all, what are family and friends for if not to help each other out. That said, mixing money and relationships can be problematic. In this article, we discuss various ways to minimise the risk of the loan going wrong and a relationship suffering.

At some stage, most of us will be asked to lend money to family or friends. Usually, we are only too happy to help. After all, what are family and friends for if not to help each other out. That said, mixing money and relationships can be problematic. In this article, we discuss various ways to minimise the risk of the loan going wrong and a relationship suffering.

Consider how likely you are to get your money back

If a friend or family member asks you for a loan, the first thing you need to decide is whether they are likely to repay the loan as agreed. This might sound obvious, but it is surprising how many people feel guilty about asking themselves the question. It is almost as if they are being disloyal by not blindly trusting that the loan will be repaid.

In many cases, you will be absolutely certain that the loan will be repaid. But sometimes there will be a nagging suspicion that you might not get your money back. Where this is the case, you need to take extra care. In particular, you need to consider the following steps even more thoroughly.

Think about what the loan is for

Are you being asked to lend someone money to buy something that you wouldn’t buy for yourself? If so, be very careful. Resentment is an easy thing to arise here.

For example, someone might ask you to lend them money so that they can buy a car that is more expensive than the one that you drive. Or they might borrow money for an overseas holiday when you yourself haven’t been able to afford such a trip.

As a general proposition, don’t lend people money to buy something that has the potential to lead to such resentment.

Agree a definite plan for repayment

When, where and how much. Every loan agreement needs to include these details. If a loan is going to be repaid in stages, then every one of these stages must be agreed beforehand.

The agreement should be in writing. Again, this might sound overly formal, but putting things in writing confirms every one of the details. You don’t necessarily need a lawyer: a simple exchange of emails between the two of you might be sufficient. But it is really important to document the shared understanding about how the loan is going to be treated.

Monitor the repayment plan

Having agreed a plan, it is important that you monitor that the plan is being stuck to. Any missed payments should be followed up immediately. At first, this can be done quite casually. You might send a simple text message: ‘hey mate. My calendar just reminded me that you are going to make a payment today. Just checking to see if that has happened?’

The longer you leave it, the more awkward it becomes. So, these things are best followed up immediately.

Only hand money over if you really have to

Sometimes, just knowing that money would be available if needed does the trick. In those cases, it pays to agree in principle to making a loan – but to not hand the money over unless and until it is actually needed.

How to say no

One of the trickiest things about a request for money from family or friends is working out how to say no while maintaining the relationship. Just how tricky this is depends on your reasons for saying no. If you simply don’t have the money to lend, this is relatively easy. You just say “sorry, can’t help. The well is dry.” However, if you are saying no because you don’t trust that you’ll get your money back, this can be quite awkward. Should you tell the truth or should you be more discreet?

Only you can make this decision. There is an old saying that goes along the lines of “if you don’t tell a lie, you don’t need a good memory.” So, telling your friend or relative the truth is the best way to proceed if that option is available.

General Advice Warning

All strategies and information provided on this website are general advice only which does not take into consideration any of your personal circumstances. Please arrange an appointment to seek personal financial, legal, credit and/or taxation advice prior to acting on this information.